Gazprom gains as Deutsche Bank upgrades stock

PolyaLesova

NEW YORK (MarketWatch) -- Shares of Russia's Gazprom, the world's largest natural-gas producer, rose Monday, after Deutsche Bank upgraded the company to buy from hold, citing rising commodity prices.

Deutsche Bank also raised Gazprom's target price by 33% to $14 a share.

The oil and gas sector, which dominates the Russian market, has shown negative returns year to date and was one of the reasons for the underperformance of the Russian stock market in the first half of the year. Read more.

The upgrade of Gazprom comes after Deutsche Bank raised its target price on Rosneft (ROSN), Russia's largest oil company, last Thursday. See Emerging Markets Report.

Deutsche Bank upgraded its midcycle Brent oil price to $60 a barrel from $45 a barrel, as well as its midcycle European gas price to $240 per million cubic meters from $205 per million cubic meters.

Following the upgrade in energy prices, the bank upgraded Gazprom to buy from hold and raised its target price to $14 a share from $10.50 a share.

"Higher energy prices mean that the economics of Gazprom's huge investment project in Yamal have improved," said Pavel Kushnir, analyst at Deutsche Bank, in a research note. "In addition, the discussion over the increase in gas-sector taxes seems to have lost momentum, and negative news flow will not hang over the market until at least early next year."

Gazprom is the world's largest natural-gas producer and reserves holder, controlling approximately 24% of global gas output and 23% of reserves. It produces 85% of Russia's gas output and controls Russia's entire gas-pipeline network, which is by far the longest in the world.

"Gazprom is very much a part of the Russian state, and therefore it's not likely to be affected by any macropolitical instability," said Tanya Costello, analyst at the Eurasia Group. "The bigger concerns about Gazprom are the pace at which it is investing in developing of new fields."

There have been a number of developments in recent weeks, such as TNK-BP Kovykta and the agreement with Total SA
TOT, +0.33%
to develop the Shtokman gas field, which are "fairly positive signs," Costello said. "However, they still don't point to any major acceleration of production at any of those fields."

In late June, BP PLC's
BP, -0.50%
TNK-BP joint venture agreed to sell Gazprom its 62.89% stake in Rusia Petroleum, the company which holds the license for the Kovykta gas field in East Siberia. It also will sell its 50% interest in East Siberian Gas Co., which is constructing the regional-gasification project. Read more.

On Friday, Total and Gazprom signed an agreement under which the French company will take a 25% stake in a joint venture to operate the giant Shtokman field in the Barents Sea. Gazprom's decision to partner with foreign oil companies was a departure from its earlier statements that it would develop the Shtokman field alone.

"It reflects a much more realistic approach," Costello said. "There are significant technical challenges at the field." She emphasized that the full terms of the deal with Total are still unclear.

Gazprom is the most influential constituent of the benchmark dollar-denominated RTS index. Oil and gas stocks accounted for 51% of the RTS index by market capitalization at the end of May. Among the other heavily weighted stocks are oil and gas majors Lukoil
LUKOY, +1.09%
(LKOD), Rosneft, Transneft, Novatek (NVTK), and Surgutneftegaz (SGGD).

"The latter benefits from high oil prices to a greater extent than Russian oil companies because of the more preferential tax regime in Kazakhstan."

Among Russian oil and gas companies currently rated as "buy" by Deutsche Bank are Gazprom, Novatek, Rosneft, Lukoil, as well as Kazmunaigaz Exploration and Production (KMG), Kazakhstan's state-owned oil company.

The RTS index closed up 0.3% at 2,066.74 points. It has gained 8% this year.

Russian mutual funds received inflows of $35 million during the week ending July 11, the fourth consecutive week of positive inflows, according to Deutsche Bank. Read more about fund flows.

"On the one hand, investors can see the market's impressive rally -- the RTS Index has closed up in 11 of the 12 previous trading sessions, which shifts their negative sentiment -- and they are starting to invest money in mutual funds again after a three-month hiatus," said Alexey Zabotkin, chief strategist at Deutsche Bank, in a research note Friday.

"On the other, as the RTS Index has crossed the psychologically important 2,000 mark, investors are now anticipating a negative reaction from Russian equities and this is a constraining factor for them," Zabotkin said.

In New York, the Market Vectors-Russia ETF
RSX, +0.38%
fell 0.7% at $44.32.

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